F - NYSE

Good day, everyone. My name is Layla, and I will be your conference operator today. At this time, I would like to welcome you to the Ford Motor Company First Quarter 2025 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] At this time, I would like to turn the call over to Lynn Antipas Tyson, Chief Investor Relations Officer.

Thank you, Layla. Welcome to Ford Motor Company's first quarter 2025 earnings call. With me today are Jim Farley, President and CEO; Sherry House, CFO; and Kumar Galhotra, Chief Operating Officer. Joining us for Q&A will be John Lawler, Vice-Chair; Andrew Frick, President, Ford Blue and Model e and Interim Head of Ford Pro; Cathy O'Callaghan, CEO of Ford Credit; and Steve Croley, Chief Policy Officer and General Counsel. Today's discussion includes some non-GAAP references. These are reconciled to the most comparable US GAAP measures in the appendix of our earnings deck. You can find the deck along with the rest of our earnings materials and other important content at shareholder.ford.com. Our discussion also includes forward-looking statements about our expectations. Actual results may differ from those stated. The most significant factors that could cause actual results to differ are included on Page 20. Unless otherwise noted, all comparisons are year-over-year. Company EBIT, EPS and free cash flow are on an adjusted basis. Lastly, I want to call out two near-term IR engagements. May 28, John Lawler will participate in a fireside chat in New York with Daniel Roeska at the Bernstein Annual Strategic Decisions Conference. Sherry House will also attend. June 4th, Sherry House will participate in a fireside chat in New York with Joe Spak at the UBS Auto and Auto Tech Conference. Now, I'll turn the call over to Jim.

Thanks, Lynn, and thanks to all of you for joining. I'm going to give you an update on the state of the business and on tariffs. Kumar is going to take you through our cost and quality progress as well as some of our mitigation for tariffs. And then Sherry is going to take you through the financial performance and guidance and hopefully, we'll have plenty of time for Q&A. Our underlying business continues to gain traction and perform well. We beat our original expectation for the quarter and before tariff-related impacts, we are on-track and within our original full-year guidance range of $7 billion to $8.5 billion in EBIT. We had our best first quarter US pickup sales in over 20 years and we delivered sequential share growth in our home market. Additionally, we saw smooth execution of several major product launches in the quarter around the globe, and we continue to deliver progress against our cost and quality targets. On tariffs, Ford supports the administration's goal to strengthen the US economy by growing American manufacturing. And we also support a level playing field globally for domestic and foreign OEMs. We also appreciate the ongoing cooperation we've had with the administration. As America's largest auto manufacturer, our engagement with Washington is helping US policymakers better understand how their proposed policy changes would impact our industry and of course, our communities. Last year, we assembled over 300,000 more vehicles in the US than our closest competitor. That includes 100% of all our full-size trucks. While some OEMs have open capacity in the US that will partially match our footprint advantage, they have to absorb higher costs, invest capital, and that will take time. It's not as simple as just assembling more vehicles in the US. OEMs must also balance customer affordability, which means the ability to import parts tariff-free. Based on what we know now, our expectations of how certain details will resolve around tariffs, we've estimated the gross impact of tariffs for full year total company EBIT of $2.5 billion and a net impact of $1.5 billion. It's still too early to fully understand our competitors' responses to these tariffs. It's also early to gauge the related market dynamics, including the potential industry-wide supply-chain disruptions and the impact of Ford's domestic manufacturing advantages. And as a result, we've decided to suspend our guidance. It's clear, however, that in this new environment in which automakers with the largest US footprint will have a big advantage. And boy, is that true for Ford. It puts us in the pole position plus we have the largest value unlock even beyond that, because of our improving cost and quality opportunities. Kumar?

Thank you, Jim. Before I walk everyone through how we are managing the business during this evolving policy landscape, I want to quickly highlight the progress we're making on cost and quality. Our industrial platform continues to deliver progress against our targets and we remain on track to deliver $1 billion in net cost reductions this year, excluding the impact of changes in tariff policy. We're also closing our competitive cost gap and efficiently leveraging our US footprint as a competitive advantage. We're improving our production stability and we're working to strengthen our supply base. We are achieving all this by shifting our focus to the key process inputs, which in turn deliver the desired outputs and those desired outputs, of course are lower cost and better quality. Let me give you a few examples of what I mean by inputs in these processes. For example, we are doing thorough readiness assessments of every workstation in our assembly plants ahead of every launch. We are building a continuous pipeline of cost and quality improvement ideas. So, not only are we executing this quarter, we have a very clear pipeline for the next quarter and the quarter after that. We're doing rigorous in-plant audits to prevent defects from reaching our customers. We have created a comprehensive system of leading metrics that provide us early warnings if any of these outputs are at risk. So here are the results. We're on-track to deliver year-over-year warranty savings. The warranty spikes during launch are now at industry leading levels. We are on-track to deliver greater than 10% improvement in repairs per 1000, both for zero months in service and three months in service for 25 vehicles. Ford and Lincoln were the most improved brands in J.D. Power’s 2025 US Vehicle Dependability Study. During our launches in the first quarter, we lost zero vehicles versus our launch acceleration curves. And we deployed 9.5 million OTAs in the first quarter to address customer concerns. We're not just improving cost and quality, the team is also in the trenches, taking actions to minimize the impact of tariffs on our business. In fact, their actions lowered the potential first quarter financial impact by nearly 35%. Here are some of the key actions we took. Vehicles shipped to Canada from Mexico via the US are now transported on bonded carriers, so they aren't subject to US tariffs. We've done the same for parts that merely pass through the United States. We are assessing where there are near-term resourcing actions to increase US content in our vehicles. We have stopped exporting vehicles to China, but we do continue to leverage China as a vehicle export hub to regions like ASEAN, Australia, South America and others where trade relations remain favorable. Looking ahead, even though nearly 80% of our parts that we use in the US are USMCA compliant, we are looking for opportunities where it makes sense to develop local supply chains. Relative to adding manufacturing capacity in the US, for Ford, this is a continuation, not a course correction. Since 2020, we have invested $50 billion in manufacturing capacity and we have a lot of investments in-flight, including manufacturing and battery capacity in Tennessee, battery capacity in Kentucky and Michigan and manufacturing capacity in Ohio. Thanks. Sherry, over to you.

Thank you, Kumar, and thank you to the team members supporting our first quarter product launches as well as those helping us mitigate the financial impact of tariffs. We are transforming Ford into a higher growth, higher margin, more capital efficient and more durable business. This was evident in our first quarter results. We delivered $1 billion in EBIT, exceeding our expectation of roughly breakeven for the quarter, driven by the team's continued progress on cost and strong net pricing in North America. When excluding the nearly $200 million impact of tariffs, this was our third consecutive quarter of year-over-year cost improvement. You'll recall that during the first quarter, we had planned downtime at several plants, most notably Kentucky Truck plant to support product launches in the rebalancing of US dealer inventory. As expected, this resulted in lower wholesales, which were down 7% and revenue of $41 billion, which was down 5%. The product launches were successful. And in March, we launched new versions of the Expedition and Navigator in North America and an all-electric version of Puma in Europe. We also began production of the new Ranger plug-in hybrid EV, which goes on sale in Europe and Australia during the second quarter. Now, on to a few highlights from the segments. Ford Pro continues to be a real competitive advantage and Ford Pro showed its resilience by delivering a solid quarter despite the planned downtime at Kentucky Truck plant and a normalization in industry pricing in more commoditized areas like delivery vans and daily rental. Demand for key products like Super Duty chassis cabs and transit wagons remains strong. In Europe, Pro grew its commercial brand leadership on the strength of transit custom and Ranger. And in North America, Pro is far and away the segment leader with over 40% share of the US Class 1 to Class 7 truck and van market. Pro continues to serve its customers in the way that they want to be served. In addition to adding new service elite base, mobile vans are driving growth in customer paid mobile repair orders, which are now 7% of all customer paid repair orders. On the software side, Pro's paid subscriptions, which deliver better than 50% gross margin, rose to 675,000, up 20% from a year ago with outsized growth in higher value services like fleet telematics, driving 40% growth in average revenue per unit. Ford Model e remains focused on improving gross margin and exercising capital discipline as our battery investments scale and we deliver next-generation products that will generate profitable future growth. Model e continues to scale and it more than doubled its first quarter wholesale volumes, driven by the recent launches of Explorer, Capri and Puma Gen-E in Europe. Model e's US retail sales grew 15% in the quarter, enabled in part by the success of the US Ford Power Promise campaign, which provides customers a home charger in standard installation. The campaign is currently seen an attach rate of 34%. Given the campaign's success, it is now being offered in Canada and in Europe. Ford Blue earned a modest profit, reflecting the expected volume decline and adverse exchange due to the strengthening of the US dollar that impacted key markets like Canada and Australia, offset partially by higher net pricing in North America. Blue continues to benefit from disciplined revenue management across the portfolio, along with cost reduction work that Kumar highlighted. Blue's international operations were once again collectively profitable. Iconic nameplates such as F-Series and Bronco continue to lead their respective segments and Bronco sales grew 35%. Blue continues to see growing customer demand for its hybrids. In fact, our hybrid mix of global sales increased 250 basis points. Additionally, based on early sales data, the newly launched Expedition and Navigator have average transaction prices that are 18% and 23% higher than the outgoing model, respectively, and they are turning on dealer lots in less than nine days. Ford Credit delivered another solid quarter with EBT up significantly, reflecting its high-quality book of business, higher financing margin, and higher net receivables. Also in the quarter, Ford Credit paid a $200 million distribution to the automotive company. First quarter auction values increased 3% year-over-year and 4% sequentially, reflecting low used car availability. Ford Credit also continues to grow its active commercial lines of credit, making it a strategic asset for our Ford Pro customers. Now, on to cash flow and balance sheet. Free cash flow was a use of $1.5 billion, more than explained by unfavorable timing differences, net spending, and changes in working capital. Our balance sheet is strong with over $27 billion in cash and over $45 billion in liquidity as of March 31st and in April, we renewed our $18 billion corporate credit facilities for another year. As we have said repeatedly, strong liquidity provides us with the flexibility to manage in this very dynamic environment, the capacity to make consistent shareholder distributions and the optionality to invest in higher-return growth opportunities that truly unlock value. To that end, consistent with our commitment to return 40% to 50% of trailing free cash flow to shareholders, last week, we declared a regular second quarter dividend of $0.15 per share, payable on June 2nd to shareholders of record on May 12. So, let's turn to our 2025 outlook. I am pleased with the progress the team has made on cost and quality. You saw green shoots of this in the first quarter, and we are on track to deliver $1 billion in net cost improvement, excluding tariffs this year. Excluding the impact of tariffs, we are within our previous EBIT guidance range of $7 billion to $8.5 billion. Based on what the company knows now and our expectation of how certain details and changes will be resolved related to tariffs, we estimate a gross adverse EBIT impact of $2.5 billion and a net adverse EBIT impact of about $1.5 billion for full year 2025. Given material tariff-related near-term risks and the potential range of outcomes, we are suspending guidance for full year 2025. These near-term risks include, among other things, industry-wide supply-chain disruption impacting production, future or increased tariffs in the US, changes in the implementation of tariffs, including tariff offsets, retaliatory tariffs, and other restrictions by other governments, and the potential related market acts, and finally, policy uncertainties associated with tax and emissions policy. We will provide an update on guidance during the Q2 earnings call. Before we go to Q&A, let me wrap with this. Our underlying performance, excluding tariffs, is in line with our original targets. Our US footprint is a competitive advantage as the industry navigates the impact of tariffs, and our strong balance sheet provides flexibility to continue to invest in profitable growth while managing industry dynamics. Thank you. Back to you, operator.

[Operator Instructions] Your first question comes from the line of Emmanuel Rosner with Wolfe Research. Please unmute and ask your questions.

Great. Thank you so much. I appreciate the color on tariff. I was hoping you can give us maybe a little bit more and in particular on the gross tariff headwinds, what goes into this $2.5 million? Could you give us maybe buckets in terms of whether -- how much is from complete vehicle, from parts, anything else that's in there? And whether the 3.75% offset that was announced by the White House last week, is that in the gross headwinds? Is that considered as well in the gross headwind? And then similar question on the net, what are the offsets?

Yeah, sure. So the $2.5 billion in gross costs is based on what we know now and our expectations of how certain details and changes will be resolved relative to tariffs. For us, we're estimating that it's roughly half parts and half imported vehicles. We have assumed that we would get credit for the US content in our vehicles that are going to be going over the border. So that is already assumed in this $2.5 billion. On the parts side, this is also inclusive of steel and aluminum. Now for steel and aluminum, that isn't just tariffs because in fact, 85% of our steel is already purchased domestically in the US and all of our sheet aluminum is purchased in the US. However, we do believe that there are pricing impacts that we will encounter. We have over 50% locked and hedged, but there are impacts, and that is included in our parts number. Additionally, there are tariffs on some parts that we import to China. So we have certain powertrains that go into China today. So this is what is comprising the $2.5 billion. And I think you had a question regarding the offsets and the offsets, the 3.75% is included in what we have come to with our $2.5 billion gross number. And our net number is…

That is great color. Go ahead.

And our net adverse EBIT impact is estimated at about $1.5 billion for the full year 2025 and that includes about $1 billion of offsetting recovery actions.

I was hoping you could give us a little more color on some of these offset actions. Is it price, is it costs? What's essentially assumed in this offset?

So the largest element of the offset is market equation optimization and I'll let you know what I mean by that. But we do have some cost mitigation examples in there as well, such as we said in our prepared remarks, vehicles shipped to Canada from Mexico via the US are now transported on bonded carriers, so they aren't subject to US tariffs, and we're doing similar actions on parts as well. Now, in the market equation optimization to come up with the $1 billion, we ran a range of market factor scenarios, segment-by-segment, channel-by-channel, vehicle-by-vehicle, inclusive of a competitive landscape. We varied inputs such as pricing, such as volumes, such as SAR and we considered that there are certain segments, for instance, where we have 100% of production in the US like our full-size pickup trucks, where competitors are much less than that. So we've taken all of these competitive dynamics as well as these inputs into consideration and have ran a number of permutations. When we triangulate on that, it comes up with this $1 billion, inclusive of some of the cost items that I mentioned.

Great. And then if I could have a follow-up on guidance, so you indicated that Ford would have been on-track excluding tariff for the initial EBIT guidance. Now obviously, Q1 was a stronger than expected performance to the tune of about $1 billion versus your previous expectations. Are there any negative offsets elsewhere that would have left you where your initial guidance is? Or are you just saying that you would have landed within the range?

Yeah, it's a very solid start, Emmanuel. Especially our warranty, our negotiated parts, purchase prices as well as the build material simplification. And frankly, very strong pricing for our new vehicles. We have so much more in front of us with the year going on. We're not going to give you any specifics within the range, but the team is off to a really great start. Obviously, our focus is on that execution for a fourth quarter in a row of year-over-year cost improvements and the results will speak for themselves.

Great. Thank you.

Your next question will come from the line of Dan Levy with Barclays. Please unmute and ask your question.

Hi, good evening. Thank you for taking the questions. I wanted to start first with a question on volume and inventory. If you could maybe give us a sense of how you expect volume to play out in the coming months, including volumes, your own volumes given the different dynamics? And previously, you gave us some guidance on inventory that you were going to get through your destocking by the middle of the year. Are you looking at your inventory any differently now that it's considerably more valuable than what it was before given the tariff dynamics?

Yeah. Thank you, Dan. We've seen obviously a very strong industry performance through April and the first half is running over $17.5 million SAR right now. So we are running a lot of scenarios on price and volume impacts. In our assumptions, we do expect industry pricing related to tariffs at about 1% to 1.5% in the second half with full year pricing flat. With that, we now expect the industry SAR to run about 0.5 million units lower than our original plan during the second half of the year, around 15.5 million units. And the important thing around that is timing. If net pricing changes come from reduced incentive spend, it could happen more immediately. In other scenarios, it comes from topline pricing, which would be a little later this summer when inventory hits dealerships. And we're likely to see that probably happen around the June time period. We're measured in our approach to pricing for tariffs and really inherent in your question. We believe our footprint advantage offers us added flexibility to the changing market dynamic. Our current inventory levels allow us to be more opportunistic in the market. And if we find an opportunity to go for share, we will if it's profitable. We left April with a 56-day supply and dealer stock in a 66 gross supply. And we're looking, as Sherry mentioned earlier, we are looking at this vehicle line by vehicle line segment-by-segment, taking into account not only tariffs, but also stock levels, macroeconomic environment and competitive pricing.

Okay, great. Thank you. As a follow-up, Jim, I'd like to ask about your efforts in software defined vehicles. And specifically, there was a media report out there that FNV4, your networked architecture is getting scrapped. So if you could just address what the -- if they confirm if that's correct, if the four plans are to develop your own or to partner with someone? And how should we think about the resource allocation toward this, what the saves could be given, I believe a lot of this was hitting in Model e?

Well, thank you for your question. Our strategy hasn't changed. It's a very significant save for capital efficiency. We simply merged our two forward zone electric architectures into one. This is very important for the company because our software is going faster than we expected and the advanced electric architectures allow us to deliver software to the vehicles and customers in a more efficient way. And we were very ambitious with our advanced electric architectures applying to ICE vehicles, not just advanced electric architectures for EV. So we brought that all together in FNV3. It's a great move for the company. Our

Great. Thank you.

Your next question will come from the line of Adam Jonas with Morgan Stanley. Please unmute and ask your question.

Hey everybody. So Jim or Sherry, whoever wants to take this. In your estimation of the $1.5 billion net tariff headwind, you referred to potential supply-chain disruption, you didn't quantify it, but you referred to potential as a part of the reason why you also withdrew the guidance. I'm just asking very bluntly, are you seeing any signs of distress or interruption in the supply-chain following the volatility and the implementation of the import tariffs to date? Just curious, like, as even after the end of the quarter, is it still all clear or are you seeing some disruption? And I have a follow up.

Yeah, Adam, this is Kumar. Let me take that from a supply chain perspective. There's been so much volatility in the tariff policy. So that could cause disruption. I'll just give you a quick example. The rare earth materials from China for example, how they are imported not just for us but for the entire industry, excuse me, has become rather complicated over the last few weeks and it could potentially -- it would take only a few parts to potentially cause some disruption into our production. There are other supply -- other uncertainty and associated tax and emission policy that could cause some disruption. And of course, the competitive response. So let's say we get disrupted and one of our competitors doesn't get disrupted or vice versa, that could obviously have an impact on volume and pricing.

Thanks, Kumar. And just as a follow-up, in previous calls, when Ford has talked about its AI strategy, it included an emphasis on automation and robotics. I'm curious how your thinking on automation has evolved given the pressures to onshore more manufacturing and specifically, has your team explored humanoid robotics with your tech partners as many of your more tech forward automotive competition both in the US and in China are doing? Thanks.

So, Adam, Kumar again. Humanoid, let me answer that part of the question first. Not directly. Obviously, we're not working on that directly. But, in our manufacturing system, we are working with several partners to -- on some very specific projects that can do AI and save us substantial amounts of cost. So, we're deploying AI in our PD system. For example, a lot of the time we take surrogate parts and then design -- manually design a lot of those parts with AI where we are automating the design process to take a bunch of weeks out of the PD system. I'll share an example with you. We have a Boston Dynamics dog in our supply -- in our Spain Valencia plant. That's where the experiment started. It has -- it literally has sensors on it that can see, hear, feel the vibration, smell any leaks of oil, et cetera, it just literally walks around the plant all day long and has changed how we do our preventive maintenance because it can see and hear and look for error states well before a human being could. So we have processes like that going through quality, through manufacturing, and through PD using AI that are overall improving our efficiency in all those areas.

Thanks, Kumar. Maybe Lynn will let you use the dog and see if it gets along with her dogs. We can talk about that offline. Thanks.

Your next question will come from the line of Joseph Spak with UBS. Please unmute and ask your question.

Thanks. Good afternoon. Sherry, you did mention that it looks like you'll be able to give guidance again with second quarter earnings. But you also started off by saying there's a lot of near-term uncertainty as it relates to tariffs, the economy, SAR, pricing, et cetera. So what really are you looking for here over the coming months to give you confidence to be able to put the guidance and outlook back in? Like, what do you expect to know that you don't know today?

Well, first off, I just want to clarify my comments relative to Q2. We'll provide an update at that point with the best information that we have at that time. I just wanted to set the expectation that we would be back talking at that point in time. There's a number of things that we are working through. Really, it's the policy issues that we had alluded to, the clarification of how some of these are landing as well as some uncertainty associated with tax and emission policy, how the customer is going to react. This is going to be very key for us. As we move into the second half of the year, we see how do they react to this potential increase in pricing that may result from these tariffs costs that the competitors and us are encountering. And then just -- really just that whole competitive dynamic and how the competition reacts as well. These are the key items.

Okay. Thank you. Sorry for misinterpreting that. And Jim, look, I know as we've sort of already gone over this call, there's some outstanding issues on tariff and trade. But we are -- it does seem like we're beyond the -- in the year, if you will, on uncertainty. But there are other regulations and policies that it seems are going to be tackled like emissions.

Yes.

So I'm wondering how you're viewing that as it relates to some of your powertrain investment, like what does it mean for the next-gen project and modeling more broadly, like you've clearly taken a lot of costs out of e and done a lot of work on the next-gen, but ultimately, you need volume. So how are you viewing that as part of the strategy?

Yeah. We see the next iteration. As you said, tariffs haven't played out. We have to see the retaliatory part of tariffs. Good example is Canada. I think we got to a good output right now with Canada. We'll see how that works out. But to your point about PTC is very important to us. The production tax credit and IRA, very critical decision for their reconciliation, upcoming tax legislation in the United States. I think we're very close to it. I think we've been incredibly -- we put a lot of effort into raising awareness of how critical this is for the states in the Midwest, where all this manufacturing investment that Sherry mentioned is going in. Obviously, the IRA consumer credits, tax for EV purchases will be very substantial upcoming policy effort, but that will also be balanced with the '27 and beyond CO2 requirements for the EPA as well as the California waiver. And I think those will be offsetting. We don't know how it's going to look right now, but that would be a second area I would say would be very meaningful in addition to tariffs. And I think there's quite a bit policy around the globe on emissions that will play out for a company like Ford that is global. But I would say, we're encouraged by the level of engagement with Ford, with all lawmakers, and the administration. They want a company like Ford that bet on America to win in this next era of the automotive industry that increasingly looks like a regional business. And I think we feel that as long as we do our jobs to engage the key decision-makers in all the policy areas around the world, that Ford will emerge as one of the companies that is in really great shape relative to his competition and for the customers. I think our -- the PTC though, I would just say is an outsized impact for us and for the industry.

Our next question will come from the line of John Murphy with Bank of America. Please go ahead.

Good evening, everybody. [Technical Difficulty] my question here. There's a lot of focus on the cost and direct impact of tariffs, but not necessarily enough for at least in my opinion, enough focus on the indirect impact and the potential for you to take market share, the potential for demand as construction goes up dramatically in the US as you see reshoring for a lot of products, particularly the F-150 and the Super Dutys as well as the rise in used vehicle pricing, which is very helpful to FMCC. So maybe you could just take a few minutes and kind of talk about those potentials because they're not -- they don't sound like they're calc in sort of the net impact because you guys are doing sort of just the scientific math, not necessarily into second and third derivative of potential impacts here and this could be pretty huge for you.

Yeah, the governor on that whether it goes slow or fast, is always going to be the competitors as Sherry said. And as she said, we've looked literally in every segment who our cross-shop competitor is, the nameplate, where they built, what kind of tariff exposure they have, what kind of pricing they've had in the past, what are differences on pricing. And we also looked at the timing of when they would make pricing decisions and when that inventory would be in the dealerships given their supply chain, because all the importers have different supply chains. And we feel very comfortable that we've made a very reasonable call embedded in that $1.5 billion net. But there is no doubt that Ford, given our manufacturing footprint, has the opportunity that few companies have. We don't want to get ahead of ourselves, but we have the freshest lineup we've ever had in North America. The F-150 is new, Super Duty is brand new. We have all new full-size SUVs. Many of our competitors import into those segments. We have a new Explorer. I mean, a lot of our utilities are new as well, and they're very well-positioned competitively. And also our inventory is in good shape. And that's why we didn't wait, John. As soon as this happened, we went to our new promotion campaign for employee pricing. It is -- it has really shrunk our stock in our dealerships, as Andrew said, and we are gaining share. The share gain in April was even higher than March. So we continue to see a win at our back. People really like the employee message -- employee pricing message and you can expect Ford to be very aggressive in the market. It gives us optionality on those upside scenarios. But at this point for financial planning, we thought we'd just go do our homework, be very reasoned in our approach, and no doubt about it, we're investing in marketing with that mentality of an opportunity.

And then just a quick second question on pricing. I think you guys were saying net price for the industry up 1% to 1.5% in the second half of the year and that might dent demand down to 15.5%. That seems like a pretty high price and elasticity of demand, particularly given all the pent-up demand that's out there. So I'm just curious if I heard that correctly, and how you guys are coming up with that number, because that sounds pretty punitive as well.

Thanks, John. It's Andrew. Just to follow-up to the previous statement that I made on it. We really are looking at the run rates not only -- so with the assumption of the 1% to 1.5% and full year pricing flat, we also see some element of payback scenario from what we've seen in the first half of the year as well as we've run up. So that was also factored into what we think the run-rate will be against the 15.5%. And that we -- that's just based on our modeling that we've done, as Jim said, kind of segment-by-segment, but also in terms of how each one of those segments performs against the elasticity of the pricing that we assumed.

And that pure light, not with medium and heavy, is that correct?

I'm sorry, can you repeat that?

Is that's a pure light vehicle SAR estimate, not including medium and heavy, is that correct?

Yes, that's correct.

Okay. Thanks very much.

We -- John, we see customers doing the can to afford a new vehicle. I mean, Cathy seen 84-month financing increases the share of our offer on the financing side. Natural level, we're well within the bounds of the industry, but customers are doing what they need to adjust for their payments.

That's helpful. Thank you, guys.

Your next question will come from Mark Delaney with Goldman Sachs. Please go ahead.

Yes, good afternoon. Thanks very much for taking my questions. I'm hoping to better understand the linearity of the $1.5 billion net tariff headwind over the balance of this year and what percent mitigation you think you might be exiting the year? Because I assume as you have more time to implement some of these offsets, the level of headwinds may moderate as the year goes on. And I guess as you think longer-term, if there are not policy changes, do you think Ford can fully mitigate the tariff costs that it's seen with supply chain cost and/or price changes?

Yeah, thank you for your question. I would say there isn't really any linearity to speak to with respect to the tariff costs and our offsets. The offsets we're going to continue to manage as we go. We're going to be looking at the market factor scenarios that I mentioned, looking at SAR pricing volume, and we'll be adjusting on a real-time basis for that as we go.

Understood. Thanks, Sherry. I just wanted to ask on Pro, you called out the continued solid growth you're having in subscribers. Maybe you could double-click where you're seeing the most strength in subscribers? Is it more coming from big fleets or small and medium-sized businesses or both? And maybe on Pro, can you also give us an update on where you stand with your goal to have 20% of Pro EBIT coming from software and services next year? Thanks.

Yeah. Thanks. It's Andrew. We continue to see our software and services business grow. We are tracking towards an increase in the software and services as a percent of EBIT by end of the year. We're adding a lot of physical services that will help drive that. We've seen -- we have the largest commercial network and continue to invest in that growth. So we've been adding capacity both in our dealer network but also in our mobile service network. We now have 66 operating Ford Pro Elite centers around the country. We have the largest mobile service units, the fleet at 4,600 units and that business continues to grow and we're seeing higher service and parts attach rate with customers that are procuring our Ford Pro Intelligence solutions. In addition, on the software services to -- the first part of your question, the paid subscriptions grew by 20% year-over-year to 625,000 total users. Telematics was up 80% and the key driver -- that was a key driver to the 40% ARPU growth that Sherry talked about and we're really seeing it across the customer base. Small, medium businesses are now utilizing at a higher rate and some of the larger fleets that are more sophisticated in this, have increased their utilization as well. So really, it's across our entire Ford Pro ecosystem and customer group.

On the vehicle side, your question was the margin pressure. We're seeing it from a few of our import competitors on the heavy-duty side for vans and pickup, but they're made overseas. So we'll see how that all shakes out in the second half of the year, whether they can really continue to be that aggressive in the market with such substantial tariff bills, and of course, rental. And their replacement cycle is changing a little bit in rental. We're not very big in rental. What we do sell in rental is pretty profitable units like F-150. So that's a smaller effect for us than others. But those are the two sub-segments that we're seeing little pricing pressure. Personally, I have my doubts about how persistent the van and pickup will be given that most of the competition is coming from imported from Mexico products, which obviously, the reality just changed.

Thank you.

Our next question will come from Ryan Brinkman with JPMorgan. Please go ahead.

Hi, thanks for taking my question. There was a reference to Ford Credit earlier in relation to tariffs, but I'd be interested to hear more about how Cathy and the team might be thinking about how the various potential impacts of tariffs on that side of the business land, including on origination volume of SAR declines on higher prices like you've insinuated, but also on the positive side with regard to lease residual or collateral values, maybe even default rate if consumers have more equity in their vehicles. How do you think these or other factors might play out? And are you looking at any scenarios where the net of them could prove positive for the credit side of the business, providing some offset to the headwind on the automotive side?

Yeah, thanks for the question. We've seen elevated auction prices already and that's reflecting obviously used across the industry, relatively low used vehicle and stock. And we're thinking that with the higher new vehicle prices as a result of tariffs, we think that the auction values -- that could lend support to auction values in the near-term, but the -- that might be muted somewhat by a slowdown in the economy in the second half. So we do see a plus and we see a minus potentially on overall auction values. In terms of consumer health, I mean, to date, as Jim mentioned, we've seen an increase in applications for longer-term financing. Obviously, the lower SAR could put some contraction in terms of overall contracts. But we see it right now a relatively balanced picture. We have to wait to see what happens in the second half of the year vis-a-vis the economic strength of the economy.

Very helpful. Thanks. And then just lastly, is there an update you can provide on your business in Europe, including what traction some of the Model e launches there might be having relative to maybe rising competition from Chinese automakers or falling competition from Tesla? And what progress you might be seeing on the restructuring program that you announced last fall? I realize you no longer report profit by geography other than in China, but where would you say you are in terms of the path to getting to where you need to be or where you would like to be in terms of profitability in that part of the world?

We'll start with the reaction to the vehicle lines that you had talked about. We launched some of our electric vehicles this past year. We just recently launched the Puma Electric vehicle, which is off to a really good start. Our run-rate of our commercial business as a whole in Europe is really strong. In fact, through the first-quarter, we've increased our share by over 2.5 points. So as the leading commercial brand, we continue to perform very well there. We have a lot of flexibility in the market with ICE, hybrid, plug-in hybrid and electric across our lineup, which allows us to really react to the market that's going on over there. In terms of the overall business itself, it's running at a better rate. We've seen an increase. We have some headwinds in some of the industry, although we've offset with share. And we've had some just general exchange issues in the market over there.

Thank you.

Our next question will come from James Picariello with BNP Paribas. [Operator Instructions] James your line is open, you'll just need to unmute. [Operator Instructions]

Can you hear me now.

We can. Please go ahead.

Okay. Sorry about that. Hi, everybody. So relative to your internal planning, what were the key factors that surprised you the most in the first quarter relative to the company's expectation for breakeven EBIT?

Sure, I would say that it was cost. We had planned that the cost was going to be significantly different than it was. We got a good surprise on warranty. That ended up being positive versus our plan. And in fact, warranty was positive on a quarter-over-quarter basis as well. So that was a big part of it. We obviously had the offset of the $200 million in tariffs and then our material costs also did better, including commodities.

Was warranty up -- was warranty a positive guy year-over-year or quarter-over-quarter?

Quarter-over-quarter, it was better and it also was better versus our plan for the quarter. So when we guided breakeven, we had anticipated it to be worse than it was.

Got it. And then just on Model e performance in particular, on a loss per vehicle basis, I think this was Model e's best quarter on record. We could see last year's $300 million in dealer stock adjustments didn't repeat, but I assume a lot of this relative momentum attributed to the EVs you're selling in Europe. Can you just speak to that and just how you're thinking about the near-term since the full-year guide has pulled? Has Model e turn the corner here and how is Ford handling Mach E production in Mexico with respect to tariffs? Thanks.

So, Model e did have a great quarter. It was about 40% better on a quarter-over-quarter basis and also a year-over-year basis. Now, that was driven by some positive pricing. Part of that had to do with our Q1 of 2024 when we had taken some significant pricing actions across our entire dealer inventory. So in some ways, there was a positive beat based on that. But we also saw some improvements in material cost with some pull aheads in material cost improvements that we were anticipating a bit later in the year. So as I said in my prepared remarks, we do think that this is going to be the best quarter of the year for Model e.

Thank you. And just thoughts on the Mach E, just what's the planning for Mach E production in Mexico? Is there any change at all to the plan or is it business as usual?

It's business as usual. We do not plan on making any adjustments to lowering the production, the vehicles in doing very well right now. We actually have a very low day supply of the vehicle itself. It's essential to our overall compliance, delivering compliance here. So it's doing well and we've actually moved some of the products to Europe at a higher -- because of the higher run-rate they're seeing as well. So it's doing very well. No change planned.

Yeah. It's interesting for me…

Appreciate it, thanks.

That we're in the fourth year of Mach-E and the sales continue to be so strong. That has not happened in the ICE business. We usually by now have aging. Now the price has come down way, way down, but I mean, relative to others, Mach-E has held up very well as product. We've invested both on the cost and the product appeal side.

Thank you.

Our next question will come from Colin Langan with Wells Fargo. Please go ahead.

Great. Thanks for taking my questions. Just wanted to clarify, the $2.5 billion that the tariff impact, the MSRP rebate that helps the parts, is that netted in the $2.5 billion or is that in the $1 billion offset because the $1 billion offset sort of sounded like more market factors that you were thinking about?

It's in the $2.5 billion.

Okay. And how should we think about that if in two years, is that enough time to get whatever sort of risk is in there addressed or in two years, there's going to be a little bit of hit that we should be thinking about as a risk of assuming tariffs stay where they are today?

It's a pretty dynamic situation. I think this is all really new for all of us. And I think we've been very clear with the government about the flexibility we need. We've been very encouraged by them because these are huge numbers, $2.5 billion and $1.5 billion is still a big number, even though maybe lower than others. I think their approach is going to be they're going to watch this very carefully and adjust accordingly. I don't think any of us would say we know exactly enough now that we can transition to a 10% or whatever the number is going to be. But I think they -- obviously, the government wants us to shift more parts to the US. So that's one thing. And yeah, from my perspective, we have USMCA coming up. So we have to go through that whole process. And I think we should just all expect to be a little bit patient during this time to see how these policies kind of work-out together. USMCA could be a substantial negotiation and a very important tool for the government and industry to work to transition to more US sourced parts. And that could change and have a iterative effect with the tariffs. So at this point, I would say too early to tell to answer your question about whether it's enough time or not.

And just lastly, just any thoughts on the cash impact of the tariffs? I mean, should we think of the $1.5 billion as all-cash? Are there any other factors we should be thinking about like working capital or CapEx needs that might result in maybe cash being better or worse than the EBIT impact?

Yeah. at this point, we're estimating that they will be approximately equal for cash. We're assuming that they would happen and settle within the quarter. So in a case where there's a cash that's paid out and there's an offset, we're assuming it would happen in the quarter. There is a CapEx impact, we do have some product, some equipment that we've already ordered that's going to be coming in from overseas and we do think that we will have an impact on our CapEx as a result.

Got it. All right. Thanks for taking my questions.

Your final question will come from the line of Itay Michaeli with TD Cowen. Please go ahead.

Great. Thank you. Good afternoon, everybody. Just two quick ones for me and thank you for all the detail today. If you were to see industry pricing move higher beyond what you've embedded in the $1.5 billion net tariff, I'm just curious whether you would generally prioritize gaining some market-share due to your strong US position or whether you would look to participate in some of that price increases? And just a second quick question maybe for Jim. How should we be thinking about Ford's plans for Level 3 autonomy? Any changes we should think about just given the changes in the electrical architecture rollout? Thank you.

Itay maybe it's Andrew. I'll take the first part. We're really looking at this through the lens that you just described, whether it be an opportunity to take additional pricing if that happens or being opportunistic to increase our market share. That's where -- as we look at the vehicle segments, the vehicle lines, we're going to look vehicle by vehicle across our channels, across our customer segments to make sure that if we're opportunistic, it actually makes sense for us from a profit perspective. And also -- and if it doesn't, then we would look to potentially take additional pricing in the market. So we have to react to what we see in the market and those are part of the scenario planning that we've described.

At the end of the quarter, we already launched BlueCruise 1.4 and 1.5. It's doing better than we thought, to be frank. Hands-free is up 15% in terms of miles driven. So, customers are really getting used to using BlueCruise. I think we're above 370 million miles now. I think that's far above almost all of our major competitors. We are on track in Level 3 and we're evaluating Level 4 other companies Level 4, I won't go into any more detail than that. But I think we're on track on our ADAS. I would describe our BlueCruise product is very competitive, very compelling, not a lot of disengagements now, do lane change regularly. The use of it is really escalating and we're now embedding it in our vehicle specifications for different series. So it's becoming more popular. And for the renewals, we've come up with a really effective way to reward our dealers for selling renewals as well. So that's good shape. I would just say just the business operations behind selling ADAS is getting healthier and the use of the system is on track. And I would say Level 3 is also on track. Obviously, it's going to be a cost and timing. I don't think we're going to be the first for high-speed highway, but I think we'll be a best -- the best and that will be a totally different internally sourced product versus the BlueCruise effort, which was very dependent on suppliers. The Level 3 team is quite different than the BlueCruise, and we want to use that as a moment to really differentiate the brand.

Terrific. Appreciate all that detail. Thanks so much.

Thank you.